Limited Price Indexation
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Limited Price Indexation or LPI is a pricing index used in the calculation of increases in certain components of scheme pension payments in the UK. The LPI is the Retail Prices Index (RPI) capped at 5%. Since the introduction of the LPI, the RPI has never reached 5%, so to date the LPI has been equal to the RPI[citation needed].
[edit] Usage
The Pensions Act 1995 required scheme pension payments arising from excess contributions to increase at the LPI. Excess contributions are those that are not protected rights contributions from contracting out of SERPS or the State second pension (S2P) nor any Additional voluntary contributions (AVCs). Only contributions made after 1997-04-06 are required to increase at the LPI, so these contributions are known as post '97 excess contributions. The rules were later amended by the Pensions Act 2004 so that excess contributions made after 2005-04-06 only had to increase at RPI capped at 2.5% instead of 5%. In either case, the scheme can of course pay increases greater than the statutory minimum. The rules for payment increases only apply to scheme pensions, i.e. pension payments made from a defined benefits (DB or final salary) scheme. Payments arising from contributions into a money purchase pension scheme (also known as a defined contribution pension scheme) are not required to increase. This is because the scheme member has the right to use their fund value to purchase an annuity with their own chosen rate of increase, which could be zero if a level pension is chosen. This right is known as the open market option or OMO and following A-day, the member also has the right to enter into an unsecured pension arrangement.
